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The bigger they are, the harder they fail

As a long term observer of the technology business I’m enamoured of the Long Tail theory of internet era market dynamics where the almost zero cost of distribution enables lots of tiny market share holders to make enough money to respectably keep the lights on with some profits to spare.

In the ‘old world of business’ – as a side observation; five years ago that phrase used to be wishful marketing-think, but not so much these days – the costs of distributing products (even software) were so huge that unless your market share was a healthy double digit percentage then your market share was soon to become no digit percentage. The internet has blown that reality to smithereens.

The Long Tail principle gives support to new market entrants whose costs start low and scale with the success, or not, of their fledgling venture. But, interestingly, it does a quick 180 degree turn if you’re a big, established player because while any measure of market share for a tightly cost constrained 5-man start-up is 100% pure upside, anything other than a strong podium finish for a big established player is corporate Kryptonite.

Big incumbents dripping in overhead will ultimately be forced to respond to shifts in market demand and bring new products to market. Some observers counter criticism of large players’ laggardly tendencies by noting that they are well protected from the ill effects of failure by virtue of large cash reserves, brand and recurring maintenance revenues, and these will enable them to simply power new products through slippery patches of market acceptance when they finally get around to it.

However, it seems it’s not that simple and the roll call over the last couple of years is telling.

Microsoft showcased and then promptly strangled before launch a range of new tablet PC devices shortly after Apple announced (announced, not launched) its iPad. The once heralded but ultimately botched Google Wave lasted barely ten months in market before it was relieved of its duties last week, and after its ill-fated homage to Keystone Kops style SaaS, Sage canned its SageLive product to save it from any further embarrassment last year after some tentative market testing. And even when you get it right, it’s still pant-wettingly volatile; analysis shows that more than 50% of Apple’s latest quarterly revenues were derived from products that didn’t exist three years ago.

Wow.

So, while big incumbents undoubtedly have the security blankets of healthy cash incomes, brand, and large customer bases exhibiting the symptoms of Stockholm Syndrome – often wilfully misread as customer loyalty – the required and precise musculature to knock-it-out-of-the-park innovate with assured success is often, aside from a couple of truly exceptional cases, completely lacking.

2 comments

“pant-wettingly volatile”… a very apt description for most digital markets… and most markets are becoming more digital.
As a previous Sage user – now a Xero user – I’ve got to say IMO it was overly ambitious of Sage to think they could do SaaS; some old dogs are better off being left to lie rather than trying to learn new tricks!

Enlightening article by Paul Graham on how Yahoo! while they were the largest search company around, how they took some wrong turns, misread the kind of culture they needed to adopt, didn’t discriminate between sustainable revenue sources and dangerous revenue dependencies, and in the process allowed Google to become #1 overnight.